FACT PATTERN 6: FEDERAL SECURITIES LAW- 10(b)(5)

Question 1

What are debt securities?

Answer 1

The investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement

Question 2

What is the debt holder’s relationship to the corporation?

Answer 2

She is a creditor, not an owner.

Question 3

What is a debt that is secured by assets called?

Answer 3

A bond

Question 4

What is an unsecured debt called?

Answer 4

A debenture

Question 5

What is an equity security?

Answer 5

Investor buys stock from the corporation, which generates capital for the business.

Question 6

What is the equity holder’s relationship to the corporation?

Answer 6

She is an owner not a creditor

Question 7

This federal law prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity). What are the Elements?
What securities law does this fall under?

Answer 7

1. At some point, the deal must use an “instrumentality of interstate commerce” (mail, telephone, or trade on a national exchange).
2. A transaction (isrepresentation of material info, insider trading, Tipping)
3. Materiality
4. Scientor
5. Reliance

This falls under rule 10(b)(5)

Question 8

What is insider trading?

Answer 8

trading securities on the basis of material inside information.

Question 9

Who is insider trading a problem for?

Answer 9

only a problem for someone high enough in the

business hierarchy that she has a duty to abstain or disclose

Question 10

Who has the duty to abstain or disclose for insider trading?

Answer 10

Someone with relationship of trust an confidence with the SH, generally this means director, officers, controlling SH and employees of the issuer.

Question 11

What is Tipping?

Answer 11

an insider passes along material inside information for a wrongful purpose.

Question 12

What does the element of materiality in a 10(b)(5) rule mean?

Answer 12

The misrepresentation or omission must concern a “material” fact–one a reasonable investor would consider important in making an investment decision.

Question 13

Who are the possible plaintiffs in a rule10(B)(5) claim?

Answer 13

1. Securities and Exchange Commission (SEC).

2. Private action for damages by buyer or seller of securities

Question 14

Widget Inc. issues a press release that Buffett has expressed an interest in acquiring a major block of its stock. The release fails to indicate that it
is Jimmy Buffett and not Warren Buffett who is interested. Because of this press release, Becky Katopolis does not sell her Widget stock. Does Becky have a 10b-5 claim?

Answer 14

No, she did not buy or sale. You need to be a buyer or seller.

Question 15

Who are the possible defendant?

Answer 15

Any person, including entities
1. Company that issues a misleading press release.
2. Buyer or seller of securities who misrepresents material information.
3. Buyer or seller of securities who trades on material inside information (when there is a duty to disclose–again, comes from relationship of trust
and confidence with shareholders of the corporation).
4. Tipper or tippee.

Question 16

L, an officer for X Co., learns that X Co. is planning to merge with Y Corp. She telephones her son-in-law Joe about this, and urges him to buy X Co. stock. Acting on the tip, Joe buys the stock. Any violations of rule 10b-5?
Do the analysis (say who is tipper tipee etc.

Answer 16

L is a tipper because: (1) she passed along material inside information in breach of a duty to X Co., and (2) she benefited by making a gift or enhancing her reputation

Joe is a tippee because he (1) traded on the tip and (2) knew or should have known that the information was improperly passed.

Question 17

What is the liability test for a tipper?

Answer 17

(1) tipper passed along material inside information in breach of a duty to her corporation and (2) she benefited.

Question 18

What is enough to be considered a benefit as a tipper under 10(b)(5)

Answer 18

Making a gift or enhancing your reputation is enough.

Question 19

What is the liability test for a tipee?

Answer 19

Tipper

(1) traded on the tip and
(2) knew or should have known that the information was improperly passed.

Question 20

D is a director of C Corp. While waiting for a concert to start, D tells her husband about a new, secret processing method that C Corp. has just developed. Bobbitt, who is sitting in the next row, overhears the conversation and buys C Corp. stock on a national exchange. Any violations of 10b-5?

Answer 20

NO. At worst, D was merely negligent, which is not enough for 10b-5 liability. So there is no tipper.

Bobbitt’s tip is ok, he can trade on the information

Question 21

In 10B(5) if there is no tipper can there still be a tippee?

Answer 21

is not enough for 10b-5 liability. So there is no tipper. AND IN 10B-5, WHEN THERE IS NO TIPPER, THERE CANNOT BE A TIPPEE.

Question 22

What is scienter?

Answer 22

D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice

Question 23

What can you put for the reliance element?

Answer 23

Said to be a separate element, as in fraud cases, but is presumed in public misrepresentation (e.g., a misleading press release) and nondisclosure
cases.